Distressed Hotel, Skilled Nursing Assets Seen as Ripe for Conversion

Skilled nursing and hotels have been hit hard during the pandemic. But even if those assets are distressed, they’re still prized by investors, although not necessarily as their original use. Increasingly, developers and investors are considering converting these distressed assets into more profitable uses, according to a new post by JLL. 

Conversions of hotels to apartments have received a lot of attention. For instance, Harbor Group International is providing $27.5 million to a hotel-to-multifamily conversion project in the Coconut Grove neighborhood of Miami. The borrower is AB Asset Management, which used the funding to acquire and redevelop the property into a Class A multifamily community that is expected to be completed in September 2022. 

But those hotel conversions aren’t the only transformations that make sense, according to JLL. More than 1,600 skilled nursing facilities in the US could potentially close in 2021, according to analysis from the American Health Care Association and National Center for Assisted Living.

At least some of these properties are being considered for conversion, if the price is right. Zach Rigby, director of JLL Capital Markets, says the existing layout needs to work for conversion costs to stay low.

“The lower performing assets are ostensibly tougher, but also attractive to many buyers because of their affordability at a time when more affordable seniors housing, student housing, workforce housing, rehabs, behavioral health centers and housing for the homeless are all in high demand,” Rigby says.

Hotel conversions can work for condominiums, affordable housing, student housing and assisted living. Interest has grown so intense that alternate-use investors are pushing pricing between 25% and 35% above traditional levels, sometimes leaving traditional hotel investors being outbid. JLL research projects that the total market value of hotels sold for conversion over the next five years will range between $25 and $30 billion.

The facilities best for conversions to residential have in-unit bathrooms and kitchenettes. JLL says full-service hotels can work well for senior living because they have conference spaces that can be turned into general-purpose rooms and industrial kitchens.

While there is interest in skilled nursing and hotel transformations, JLL says there won’t be widespread conversions. Widespread vaccine distribution should help fill beds in skilled nursing centers and encourage people to travel, which will boost hotels.

Still, conversions aren’t going away anytime soon.

“The trend of opening up these distressed properties to a much larger buyer pool is here to stay for the foreseeable future given the demand from a wide array of users,” Jason Skalko, Director, JLL Capital Markets, Seniors Housing and Healthcare, said in the post. “We are seeing more interest in behavioral health conversions, including rehabs, and there is unlimited demand for affordable housing.”